The first key step in creating a DCF model is forecasting free cash flows, typically for a five to ten year period.

A Discounted Cash Flow (DCF) model is a valuation method used to estimate the current value of an asset today based on its future cash flows.

Kenji states that free cash flows usually occur throughout the year, not just at year-end, requiring a mid-year adjustment (e.g., using 0.5 instead of 1) for more accurate discount factor calculations.

Kenji states that a DCF model is not always applicable for companies with negative free cash flows, such as startups or highly growing companies, as it would result in a nonsensical negative valuation, requiring other valuation methods.

The second step in a DCF model is calculating the Weighted Average Cost of Capital (WACC), which serves as the discount rate to bring future cash flows back to the present.

The final step in a DCF model is to calculate the enterprise value, equity value, and implied share price to arrive at a valuation.